A mostly macro- and international economics weblog for students (and anyone else!)

Wednesday, September 19, 2007

Bernanke Credibility Watch

The Federal Reserve lowered its target for the federal funds rate by 50 basis points (hundredths of a percent) to 4.75%. James Hamilton at Econbrowser examines the reactions of the bond, stock, currency, oil and gold markets. This is cause for concern:

But the really interesting thing is what happened at the longer end of the yield curve. The ten-year nominal yield actually increased, which is in contrast to the usual historical pattern for long yields to move, albeit less dramatically, in tandem with the short. Taken together with today's fall in the 10-year inflation-adjusted Treasury yield, the bond market seems to view the Fed as having surrendered some on its long-run inflation goals.

Expectations are important for monetary policy. Long-term interest rates reflect, in part, inflationary expectations. The increase suggests that markets are now anticipating looser monetary policy, which will lead to more inflation. That is, the Fed's credibility as guarantor of low inflation seems to have been dented, early in Ben Bernanke's tenure as chairman.

Statcounter (Unique Visits)

Commercial Enquiries

At this point, I am not interested in making money from this blog, so I generally do not respond to messages about business opportunities, etc. I am also not interested in press releases or PR "pitches" for interview opportunities and the like.